TY - JOUR
T1 - Does duration of competitive advantage drive long-term returns in the stock market?
AU - Forsyth, Juan A.
AU - Mongrut, Samuel
N1 - Publisher Copyright:
© 2022 Universidade de Sao Paulo. All rights reserved.
PY - 2022/5
Y1 - 2022/5
N2 - The purpose of this article was to develop a new indicator to estimate the aggregate long-term expected return on stocks. There is not a widely used method to model directly the aggregated expected return of the stock market. Most current methods use indirect approaches. We developed a new indicator that does not need an econometric model to generate expected returns and provides an estimate of the long-term expected returns. The proposed methodology can be used to develop an indicator of future returns of the stock market similar to the yield-to-maturity used for bonds. We used a restricted one-stage constant-growth model - a variant of the residual income model (RIM) - whose main input is the duration of companies’ competitive advantage and cyclical adjusted real return on invested capital (ROIC) with a 10-year average. We used a new methodology to develop an indicator of the long-term expected return on the equity market at the aggregate level, considering the duration of the competitive advantage of companies. Our results showed a strong correlation between the estimated implied return on equity (IRE) of current stock prices and realized returns of the 10-year real total return of the index.
AB - The purpose of this article was to develop a new indicator to estimate the aggregate long-term expected return on stocks. There is not a widely used method to model directly the aggregated expected return of the stock market. Most current methods use indirect approaches. We developed a new indicator that does not need an econometric model to generate expected returns and provides an estimate of the long-term expected returns. The proposed methodology can be used to develop an indicator of future returns of the stock market similar to the yield-to-maturity used for bonds. We used a restricted one-stage constant-growth model - a variant of the residual income model (RIM) - whose main input is the duration of companies’ competitive advantage and cyclical adjusted real return on invested capital (ROIC) with a 10-year average. We used a new methodology to develop an indicator of the long-term expected return on the equity market at the aggregate level, considering the duration of the competitive advantage of companies. Our results showed a strong correlation between the estimated implied return on equity (IRE) of current stock prices and realized returns of the 10-year real total return of the index.
KW - Stock market
KW - Return on equity
KW - Implied cost of capital
KW - Long-term returns
KW - Competitive advantage
UR - https://www.mendeley.com/catalogue/e88b33ba-7578-3f2f-a084-f8cf593f4389/
UR - http://www.scopus.com/inward/record.url?scp=85131651871&partnerID=8YFLogxK
U2 - 10.1590/1808-057x202113660
DO - 10.1590/1808-057x202113660
M3 - Article in a journal
SN - 1519-7077
VL - 33
SP - 329
EP - 342
JO - Revista Contabilidade & Finanças
JF - Revista Contabilidade & Finanças
IS - 89
ER -